THE Zimbabwe dollar has plunged over $17 500 against the US currency on the auction market, making it the steepest decline since Gideon Gono took over as Reserve Bank governor in 2003.
Two weeks ago, before Gono devalued the Zimbabwe dollar, the exchange rate stood at US$1: $10 890.
On July 18, it was trading at US$1: $10 890 before collapsing to US$1: $17 800.
On July 28 the auction rate hit US$1: $17 701 with the lowest average bid rate accepted at $17 698 and a weighted average rate of $17 700.
Economic analyst, John Robertson, said the rate was responding to market forces.
He said the authorities tried to control the exchange rate but that this only worsened the country’s foreign currency shortage.
“It should have been recognised long before that the exchange rate should be determined by market forces,” he said.
Robertson said the new exchange rate would not revive exporting firms that have already collapsed.
The shortage of foreign currency on the auction floor continues to worsen as demand is now about 20 times the amount in supply.
The shortages are compensated on the flourishing parallel market where major currencies like the US dollar and British pound are trading at about US$1:$40 000 and £1:$70 000 respectively.
On August 1, 7 358 bids were rejected out of 7 418. In the previous auction of July 28, 5 489 bids were rejected out of 5 544.
The foreign currency auction can only allot a fixed US$12,5 million.
On the auction of May 12, the total amount of bids was US$267 296 306, about 25 times more than the available US$11 million.
There were 8 291 out of which 8 180 were rejected, a rejection of about 98,7%.
According to Finhlod’s monthly economic report for March, the amount of bids surpassed the US$100 million mark at the February 10 and 14 auctions, translating into demand of 9 times more than the fixed supply of US$11 million per auction.
“The average rejection rate rose from 93% in January to 97% in February, reflecting the continued excess demand of foreign currency on the auction,” Finhold said in its Economic Update of March.
The Reserve Bank of Zimbabwe introduced the foreign currency auction system in a bid to manage and ration the country’s dwindling foreign currency reserves.
The system involves the auctioning of foreign currency to the market bi-weekly, on Mondays and Thursdays, through a currency exchange at the central bank.
At the auction, all bids to be submitted must be for foreign exchange transactions with prior Exchange Control Approval.
Exporters and other suppliers of foreign exchange make offers to the currency exchange through authorised dealers and bids are supposed to be from importers and other users of foreign exchange.
Authorised dealers are required to aggregate small bids of less than US$5 000 and present them as one bid to the auction on behalf of the small bidders.
All bids are submitted in US dollars only.